The upside of this attention is that you should want the Bitconnects of the world gutted by regulators.

The downside is blockchain-based businesses need to start treating their native cryptoassets as securities. Even tokens created pursuant to a SAFT aren’t likely safe based on recent SEC stances and statements.

As a result, you will likely see digital asset issuers increasingly relying on securities law exemptions.

One option is for ICOs that wish to be compliant is to qualify as an exempt securities offering under Regulation Crowdfunding (“Reg CF”). Indeed, some ICOs, like Indeco, have already used this option since late 2017.

Reg CF Features

The unique feature of Reg CF, compared to other security exemptions, is that the offering must be done through crowdfunding portal that is registered as a broker-dealer with the SEC and the Financial Industry Regulatory Authority ("FINRA"). Typically, this is a platform like Indiegogo or Kickstarter.

The key pros and cons of Reg CF that ICOs might consider are:

P​ros

Number of Investors – Unlimited.

Solicitation – General solicitation (aka, open, public marketing) is allowed if it includes certain disclosures including, for example, the terms of the offering and the crowdfunding platform used.

Cons

Raise Limit – You can only raise up to $1m in a 12-month period.

Limits on Investment per Investor

If the investor’s annual income is less than $100k, his/her contribution is limited to the greater of (i) $2,000, or (ii) 5% of the lesser of: (a) the investor’s annual income, or (b) net worth.

If the investor’s annual income and net worth are equal to or greater than $100k, his/her investment is limited to 10% of the lesser of: (a) his/her annual income, or (b) net worth.

Issuer Limits – The issuer must be a US entity.

Transfer Restrictions – Generally, you cannot transfer the security for one year, with limited exceptions.

Based on the limits an individual investor can invest, you can see Reg CF is geared more at getting small investments from a large number of people.

This contrasts with traditional exemptions like Reg D, that restrict who can invest to high-net worth individuals, and are geared at getting large investments from a small number of people.

Takeaway

Given the relatively low limit of $1m that issuers can raise under Reg CF, and that the standard ICO now can raise much more than that, Reg CF isn’t ideal for ICOs that want to be compliant with security laws.

Have any thoughts or comments? You should let us know in the comments.

Archives

This website and any communications related to it do not create a lawyer-client relationship. The material provided on this site may not reflect the most current legal developments. We disclaim all liability for actions taken or not taken based on any or all of the content of this site. Do not act or refrain from acting upon any information herein provided without seeking professional legal counsel.

Nothing written, linked or referenced is financial or investment advice.

The views, explanations, positions and statements made on this blog are not to be treated as conclusive opinions of any person or entity, whether lawyer, law firm, investment adviser, investment institution or the like.

You can stay up-to-date with crypto news and regulation by subscribing to our (infrequent) email list: